3 Big TCJA Changes Affecting 2018 Individual Tax Returns and Beyond

When you file your 2018 income tax return, you’ll likely find that some big tax law changes affect you — besides the much-discussed tax rate cuts and reduced itemized deductions. For 2018 through 2025, the Tax Cuts and Jobs Act (TCJA) makes significant changes to personal exemptions, standard deductions and the child credit. The degree to which these changes will affect you depends on whether you have dependents and, if so, how many. It also depends on whether you typically itemize deductions.

1. No more personal exemptions

For 2017, taxpayers could claim a personal exemption of $4,050 each for themselves, their spouses and any dependents. For families with children and/or other dependents, such as elderly parents, these exemptions could really add up.

For 2018 through 2025, the TCJA suspends personal exemptions. This will substantially increase taxable income for large families. However, enhancements to the standard deduction and child credit, combined with lower tax rates and other changes, might mitigate this increase.

2. Nearly doubled standard deduction

Taxpayers can choose to itemize certain deductions or take the standard deduction based on their filing status. Itemizing deductions when the total will be larger than the standard deduction saves tax, but it makes filing more complicated.

For 2017, the standard deductions were $6,350 for singles and separate filers, $9,350 for head of household filers, and $12,700 for married couples filing jointly.

The TCJA nearly doubles the standard deductions for 2018 to $12,000 for singles and separate filers, $18,000 for heads of households, and $24,000 for joint filers. For 2019, they’re $12,200, $18,350 and $24,400, respectively. (These amounts will continue to be adjusted for inflation annually through 2025.)

For some taxpayers, the increased standard deduction could compensate for the elimination of the exemptions, and perhaps provide some additional tax savings. But for those with many dependents or who itemize deductions, these changes might result in a higher tax bill — depending in part on the extent to which they can benefit from enhancements to the child credit.

3. Enhanced child credit

Credits can be more powerful than exemptions and deductions because they reduce taxes dollar-for-dollar, rather than just reducing the amount of income subject to tax. For 2018 through 2025, the TCJA doubles the child credit to $2,000 per child under age 17.

The TCJA also makes the child credit available to more families. For 2018 through 2025, the credit doesn’t begin to phase out until adjusted gross income exceeds $400,000 for joint filers or $200,000 for all other filers, compared with the 2017 phaseout thresholds of $110,000 and $75,000, respectively.

The TCJA also includes, for 2018 through 2025, a $500 credit for qualifying dependents other than qualifying children.

Maximize your tax savings

These are just some of the TCJA changes that may affect you when you file your 2018 tax return and for the next several years. We can help ensure you claim all of the breaks available to you on your 2018 return and implement TCJA-smart tax-saving strategies for 2019.

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Many businesses will pay less federal income taxes in 2018 and beyond, thanks to the Tax Cuts and Jobs Act (TCJA). And some will spend their tax savings on merging with or acquiring another business. Before you jump on the M&A bandwagon, it’s important to understand how your transaction will be taxed under current tax law.

Stock vs. Asset Purchase

From a tax perspective, a deal can be structured in two basic ways:

1. Stock (or ownership interest) purchase. A buyer can directly purchase the seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes. This is commonly referred to as a “stock sale,” although some sales may involve partner or member units.

The now-permanent flat 21% corporate federal income tax rate under the TCJA makes buying the stock of a C corporation somewhat more attractive for two reasons. First, the corporation will pay less tax and, therefore, generate more after-tax income. Second, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold. These considerations may justify a higher purchase price if the deal is structured as a stock purchase.

In theory, the TCJA’s reduced individual federal tax rates may also justify higher purchase prices for ownership interests in S corporations, partnerships and LLCs treated as partnerships for tax purposes. Why? The passed-through income from these entities also will be taxed at lower rates on the buyer’s personal tax returns. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and they could be eliminated even earlier, depending on future changes enacted by Congress.

2. Asset purchase. A buyer can also purchase the assets of the business. This may be the case if the buyer cherry-picks specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC (SMLLC) that’s treated as a sole proprietorship for tax purposes.

Under federal income tax rules, the existence of a sole proprietorship or an SMLLC treated as a sole proprietorship is ignored. Rather, the seller, as an individual taxpayer, is considered to directly own all the business assets. So, there’s no ownership interest to buy.

Important: In certain circumstances, a corporate stock purchase can be treated as an asset purchase by making a Section 338 election. Ask your tax advisor for details.

Divergent Objectives

Business buyers and sellers typically have differing financial and tax objectives. While the TCJA doesn’t change these basic objectives, it may change how best to achieve them.

Buyers typically prefer asset purchases. A buyer’s main objective is usually to generate sufficient cash flow from the newly acquired business to service any acquisition-related debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

For legal reasons, buyers usually prefer to purchase business assets rather than ownership interests. A straight asset purchase transaction generally protects a buyer from exposure to undisclosed, unknown and contingent liabilities.

In contrast, when an acquisition is structured as the purchase of an ownership interest, the business-related liabilities generally transfer to the buyer — even if they were unknown at closing.

Buyers also typically prefer asset purchases for tax reasons. That’s because a buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price.

Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets. Expanded first-year depreciation deductions under the TCJA make asset purchases even more attractive, possibly warranting higher prices if the deal is structured that way. (See “3 Favorable TCJA Changes for Businesses” at right.)

In contrast, when corporate stock is purchased, the tax basis of the corporation’s assets generally can’t be stepped up unless the transaction is treated as an asset purchase by making a Sec. 338 election.

Important: When an ownership interest in a partnership or LLC treated as a partnership for tax purposes is purchased, the buyer may be able to step up the basis of his or her share of the assets. Consult your tax advisor for details.

Sellers generally prefer stock sales. On the other side of the negotiating table, a seller has two main nontax objectives:

• Safeguarding against business-related liabilities after the sale, and
• Collecting the full amount of the sales price if the seller provides financing.

A seller may provide financing through an installment sale or an earnout provision (where a portion of the purchase price is paid over time or paid only if the business achieves specific financial benchmarks in the future).

Of course, the seller’s other main objective is minimizing the tax hit from the sale. That can usually be achieved by selling his or her ownership interest in the business (corporate stock or partnership or LLC interest) as opposed to selling the business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Important: Some, or all, of the gain from selling a partnership interest (including an interest in an LLC treated as a partnership for tax purposes) may be treated as higher-taxed ordinary income. Consult your tax advisor for details.

Balancing Act

When negotiating a sale, the buyer and seller need to give and take, depending on their top priorities. For example, a buyer may want to structure the deal as an asset purchase. Agreeing on a higher purchase price, combined with an earnout provision, may convince the seller to agree to an asset sale, which comes with a higher tax bill than a stock sale.

Alternatively, a seller might insist on a stock sale that would result in lower-taxed long-term capital gain. In exchange, the buyer might agree to pay a lower purchase price to partially compensate for the inability to step up the basis of the corporation’s assets. And the seller might agree to indemnify the buyer against certain specified contingent liabilities (such as underpaid corporate income taxes in tax years that could still be audited by the IRS).

Purchase Price Allocations

Another bargaining chip in asset purchase deals — including corporate stock sales that are treated as asset sales under a Sec. 338 election — is how the purchase price is allocated to specific assets. The amount allocated to each asset becomes the buyer’s initial tax basis in the asset for depreciation or amortization purposes. It also serves as the sales price for the seller’s taxable gain or loss on each asset.

In general, buyers generally want to allocate more of the purchase price to:

• Assets that will generate higher-taxed ordinary income when converted into cash, such as purchased receivables and inventory, and
• Assets that can be depreciated in the first year under the expanded bonus depreciation and Sec. 179 deduction breaks.

Buyers prefer to allocate less to assets that must be amortized or depreciated over relatively long periods (such as buildings and intangibles) and assets that must be permanently capitalized for tax purposes (such as land).

On the flip side, sellers want to allocate more of the purchase price to assets that will generate low-taxed long-term capital gains, such as intangibles, buildings and land. Tax-smart negotiations can result in allocations that satisfy both sides.

Need Help?

Buying or selling a business may be the most important transaction of your lifetime, so it’s critical to seek professional tax advice as you negotiate the deal. After the deal is done, it may be too late to get the best tax results.

Every nonprofit strives to advance its mission. The board of directors is responsible for guiding the organization in its pursuit of that mission. It is the board’s responsibility to ensure that all assets and activities are used to further the mission, that conflicts of interest are recognized and disclosed, and that the organization obeys laws, regulations, and its bylaws. The board must ensure that decisions are in the best interest of the organization and accomplishment of its exempt purpose.

In adherence to these responsibilities, the board provides a foundation for the organization by adopting formal policies. Policies not only provide guidance, but they protect the organization from legal challenges, provide compliance with regulations and funding agencies, and set the tone for ethical and transparent conduct by employees. Policies also allow organizations to operate consistently when similar or recurring situations arise or when turnover in management and governance occurs.

If your nonprofit organization has been operating for some time, you likely have policies in place already. If you don’t have an inventory of your policies, now is a good time to create one. Start with identifying which policies you currently have in place. Every policy should be reviewed and approved by the board, so begin with reading previous board minutes. Also, the management team or department heads likely know of policies that affect them directly. Once you have identified what you have in place already, group them together in one location, electronically or on paper, and create an index, assigning numbers to each policy. Once you have the inventory of current policies, determine which additional policies are needed.

Policies to consider:

• Code of Ethics (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-code-of-ethics) 
• Conflict of Interest Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-conflict-of-interest-policy) 
• Credit Card Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-credit-card-policy) 
• Delegation of Authority Policy
• Designation of Funds Policy
• Document Retention Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-document-retention-policy) 
• Gift Acceptance Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-gift-acceptance-policy) 
• Information Security Policy 
• Investment Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-investment-policy) 
• Liquidity Policy (https://www.yeoandyeo.com/blog/start-creating-a-liquidity-policy-now) 
• Operating Reserve Policy 
• Restricted Net Assets Policy 
• Social Media Policy
• Travel and Expense Reimbursement Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-travel-and-expense-reimbursement-policy) 
• Whistleblower Policy (https://www.yeoandyeo.com/blog/nonprofit-quick-tip-whistleblower-policy)

In determining which policies your organization needs to implement, don’t assume that your organization needs a written policy for everything; customize this list to adhere to your organization’s specific needs. Also consider the enforceability of the policy, as well as the consequences of not adopting a policy. Be sure to use a template or sample policy, making appropriate changes for your organization.

As you identify the policies your organization needs to implement, consider the process for implementation. It may seem overwhelming, but use a system for addressing these policies. Determine who introduces a policy and who must review new policies before they go to the board. If your board meets once a month, you may consider reviewing and adopting a policy every month or every other month until you have each of them in place. One or two people should be assigned to manage the policy process.

A significant part of the policy process is communication. Policies will be effective only if the board and staff are knowledgeable about the policies and their significance. This is done through board orientation and new hire training, as well as ongoing meetings and trainings. Not only do your board and staff need to know what the policy is, but they also need to know who is responsible for enforcing it, who is monitoring compliance, and what the consequences are for noncompliance.

Forms should be developed where necessary. For example, your conflict of interest policy may stipulate that board members will disclose, at least annually, any conflicts of interest. To facilitate this disclosure, you may create a form that captures the appropriate information for board members to complete and return at your annual meeting.

By using a systematic approach, the board can provide the guidance and oversight needed to steer the organization in the pursuit of its mission. Formal policies provide a solid foundation for ensuring decisions are in the best interest of the organization, allowing board members to uphold their responsibilities and obligations to the organization. Effective board policies produce effective nonprofit boards.

An organization’s code of ethics establishes the integrity and ethical values that provide a framework for decision-making. It guides behavior to be in support of the mission, for staff, board members, volunteers and others who work with the organization. The code of ethics is also an important step in creating a control environment where internal controls throughout the organization are effectively carried out.

Key elements to include in a code of ethics are: responsibilities of the board; expectation of personal and professional integrity; commitment to prudent financial management; requirement for compliance with applicable laws and regulations; and declaration of inclusiveness and diversity. As your organization establishes a code of ethics, it’s also important to consider how deviations will be identified and remedied in a timely and consistent manner.

Once established, the code of ethics will promote appropriate and consistent decision-making and behavior that is in alignment with your organization’s mission. Set your organization up for success by establishing the right tone at the top.

The new FASB lease standard (ASC Topic 842, Leases) is not here yet, but it is not too early to think about how this will impact your organization, especially if it is subject to debt covenants. Throughout 2019, we will highlight some of the nuances and concepts to begin preparing for in relation to this new standard.

The most talked-about impact of Topic 842 is the fact that lessees following U.S. GAAP will now recognize assets and liabilities from operating leases. The new criteria intends to provide financial statement users with a more complete picture of the extent of an organization’s right-of-use assets, and the impact on its future cash flows. Under current U.S. GAAP, assets and liabilities were not recognized for operating leases, only for financing leases. Therefore, this new standard is poised to significantly impact the balance sheet.

As you begin to consider this change, ask yourself, “What are my organization’s operating leases?” and begin keeping a log of these. The standard defines a lease as a “contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration.” Under the new standard, organizations will recognize a right-of-use asset and a lease liability for nearly all of their leases associated with an asset (i.e., property and equipment). There are exceptions for leases with terms of less than 12 months and where there is not a reasonably certain expectation of renewal. For these shorter-term leases, organizations can elect not to recognize a lease asset and liability. Additionally, leases for services, or service contracts, are generally not required to be recognized as assets and liabilities.

The accounting for operating leases generally will be straightforward. Organizations will recognize a right-of-use asset and a lease liability on the balance sheet. Initially, both will be measured at the present value of the lease payments. On the income statement, organizations will recognize a single lease expense, which will include the charge-off of both the discount on the lease liability and amortization of the right-of-use asset. The lease liability will be amortized using the effective interest rate method, while the right-of-use asset will be amortized on the straight-line basis.

In summary, the key takeaways from this article are:

• Operating leases with terms over 12 months will now be recognized on the balance sheet as assets and liabilities.
• It’s not too early to start thinking about how this will impact your financial statements.
  • Start a log of your organization’s current leases.
  • Determine if you have any debt covenants that could be impacted by changes to the balance sheet.
  • Consider changes to policies, procedures and internal controls related to the new standard.

As a reminder, implementation of this new standard becomes effective for non-public companies for fiscal years ending December 15, 2020, and after. Stay tuned as we will continue to highlight the nuances and impacts of this new standard as we move closer to the implementation date.

 

 

 

 

 

Qualifying Small Employer Health Reimbursement Accounts FAQ

On December 13, 2016, President Obama signed the 21st Century Cures Act (Cures Act) into law. The Cures Act provides a method for certain small employers to reimburse individual health coverage premiums up to a dollar limit through HRAs called “Qualified Small Employer Health Reimbursement Arrangements” (QSE HRAs). This provision will go into effect on January 1, 2017.

The IRS opened the 2018 income tax return filing season on January 28. Even if you typically don’t file until much closer to the April 15 deadline, this year consider filing as soon as you can. Why? You can potentially protect yourself from tax identity theft — and reap other benefits, too.

What is tax identity theft?

In a tax identity theft scheme, a thief uses your personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.

You discover the fraud when you file your return and are informed by the IRS that the return has been rejected because one with your Social Security number has already been filed for the same tax year. While you should ultimately be able to prove that your return is the legitimate one, tax identity theft can cause major headaches to straighten out and significantly delay your refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected — not yours.

What if you haven’t received your W-2s and 1099s?

To file your tax return, you must have received all of your W-2s and 1099s. January 31 was the deadline for employers to issue 2018 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2018 interest, dividend or reportable miscellaneous income payments.

If you haven’t received a W-2 or 1099, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

What are other benefits of filing early?

Besides protecting yourself from tax identity theft, the most obvious benefit of filing early is that, if you’re getting a refund, you’ll get that refund sooner. The IRS expects more than nine out of ten refunds to be issued within 21 days.

But even if you owe tax, filing early can be beneficial. You still won’t need to pay your tax bill until April 15, but you’ll know sooner how much you owe and can plan accordingly. Keep in mind that some taxpayers who typically have gotten refunds in the past could find themselves owing tax when they file their 2018 return due to tax law changes under the Tax Cuts and Jobs Act (TCJA) and reduced withholding from 2018 paychecks.

Need help?

If you have questions about tax identity theft or would like help filing your 2018 return early, please contact us. While the new Form 1040 essentially does fit on a postcard, many taxpayers will also have to complete multiple schedules along with the form. And the TCJA has changed many tax breaks. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.

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Public Act 202 of 2017 requires governments to prepare additional reporting for pension and other post-employment benefits (OPEB) plans using Form 5572. By this time, every government that has had this reporting requirement has filed this form, and the potential waivers or corrective action plans to address underfunded status.

• For primary governments, underfunded status for a pension plan is defined as having plan assets that are not at least 60 percent of the total liability, and the actuarially determined contribution is greater than 10 percent of total governmental fund revenues.
• For primary governments, underfunded status for an OPEB plan is defined as having plan assets that are not at least 40 percent of the total liability, and the actuarially determined contribution is greater than 12 percent of total governmental fund revenues.

The Michigan Department of Treasury (Treasury) issued a memo on September 25, 2018, regarding the application of uniform assumptions. For reporting on Form 5572, Treasury requires uniform assumptions to be included for fiscal years ending 2019, if the audited financial statements were based on an actuarial valuation issued after December 31, 2018. In all other cases, reporting of pension and OPEB liabilities under the uniform assumptions is required for fiscal years ending no later than 2020. Refer to the full memo found on the State of Michigan’s website.

Treasury will use the uniform assumptions to increase comparability of pension and OPEB plans from one municipality to the next. Treasury recommends that all actuarial valuations issued after December 31, 2018, include the provisions of the uniform assumptions. It is important to consider whether using the uniform assumptions for the measurement of your municipality’s pension or OPEB liabilities are appropriate under GAAP, or whether the liabilities should be calculated using two sets of assumptions. If using two sets of assumptions is appropriate, both amounts will be reported to Treasury on Form 5572. If your municipality uses two sets of assumptions, the calculated liabilities may vary greatly.

The uniform assumptions were developed by Treasury with the help of an independent actuary firm as well as numerous stakeholders that represented local governments, employees and retirees, actuaries, and accounting professionals. The uniform assumptions are not radically different than what most local governments are currently using in their assumptions to calculate pension and OPEB liabilities; however, the assumptions can vary greatly from one government to another based on the individual government’s experience.

Treasury has issued the following uniform assumptions for fiscal year 2019:

Assumption	Uniform Assumption
Investment Rate of Return	Maximum of 7.00%
Discount Rate	Blended discount rate calculated using GASB Statements No. 68 and No. 75 methodology. For periods in which projected plan assets are Sufficient to make Projected Benefit Payments: Maximum of 7.00% For periods in which projected plan assets are Not Sufficient to make Projected Benefit Payments: 3.00%
Salary Increase	A minimum of 3.50% or based on an actuarial experience study conducted within the last five years.
Mortality Table	A version of the RP-2014 Mortality Table or based on an actuarial experience study conducted within the last five years.
Healthcare Inflation (for Medical and Drug)	Non-Medicare: Initial rate of 8.50% decreasing .25% per year to a 4.50% long-term rate Medicare: Initial rate of 7.00% decreasing .25% per year to a 4.50% long-term rate
Amortization of the Unfunded Actuarial Accrued Liability	Local units must amortize the Unfunded Actuarial Accrued Liability (UAAL) over a maximum closed period of: Pension Systems: 20 years Retiree Healthcare Systems: 30 years Closed plans must use a level dollar amortization method.  Open plans may use a level dollar or percent of pay amortization method.

The CPAs at Yeo & Yeo recommend that municipalities work with their actuaries to ensure compliance with Public Act 202 of 2017 and make certain that appropriate assumptions are applied when developing pension and OPEB liabilities.

 

The flat 21% federal income tax rate for C corporations under the Tax Cuts and Jobs Act (TCJA) has been great news for these entities and their owners. But some fundamental tax truths for C corporations largely remain the same:

C corporations are subject to double taxation. Double taxation occurs when corporate income is taxed once at the corporate level and again at the shareholder level as dividends are paid out. The cost of double taxation, however, is now generally less because of the 21% corporate rate.

And double taxation isn’t a problem when a C corporation needs to retain all its earnings to finance growth and capital investments. Because all the earnings stay “inside” the corporation, no dividends are paid to shareholders, and, therefore, there’s no double taxation.

Double taxation also isn’t an issue when a C corporation’s taxable income levels are low. This can often be achieved by paying reasonable salaries and bonuses to shareholder-employees and providing them with tax-favored fringe benefits (deductible by the corporation and tax-free to the recipient shareholder-employees).

C corporation status isn’t generally advisable for ventures with appreciating assets or certain depreciable assets. If assets such as real estate are eventually sold for substantial gains, it may be impossible to extract the profits from the corporation without being subject to double taxation. In contrast, if appreciating assets are held by a pass-through entity (such as an S corporation, partnership or limited liability company treated as a partnership for tax purposes), gains on such sales will be taxed only once, at the owner level.

But assets held by a C corporation don’t necessarily have to appreciate in value for double taxation to occur. Depreciation lowers the tax basis of the property, so a taxable gain results whenever the sale price exceeds the depreciated basis. In effect, appreciation can be caused by depreciation when depreciable assets hold their value.

To avoid this double-taxation issue, you might consider using a pass-through entity to lease to your C corporation appreciating assets or depreciable assets that will hold their value.

C corporation status isn’t generally advisable for ventures that will incur ongoing tax losses. When a venture is set up as a C corporation, losses aren’t passed through to the owners (the shareholders) like they would be in a pass-through entity. Instead, they create corporate net operating losses (NOLs) that can be carried over to future tax years and then used to offset any corporate taxable income.

This was already a potential downside of C corporations, because it can take many years for a start-up to be profitable. Now, under the TCJA, NOLs that arise in tax years beginning after 2017 can’t offset more than 80% of taxable income in the NOL carryover year. So it may take even longer to fully absorb tax losses.

Do you have questions about C corporation tax issues post-TCJA? Contact us.

© 2019

 

Commercial buildings and improvements generally are depreciated over 39 years, which essentially means you can deduct a portion of the cost every year over the depreciation period. (Land isn’t depreciable.) But special tax breaks that allow deductions to be taken more quickly are available for certain real estate investments.

Some of these were enhanced by the Tax Cuts and Jobs Act (TCJA) and may provide a bigger benefit when you file your 2018 tax return. But there’s one break you might not be able to enjoy due to a drafting error in the TCJA.

Section 179 expensing

This allows you to deduct (rather than depreciate over a number of years) qualified improvement property — a definition expanded by the TCJA from qualified leasehold-improvement, restaurant and retail-improvement property. The TCJA also allows Sec. 179 expensing for certain depreciable tangible personal property used predominantly to furnish lodging and for the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.

Under the TCJA, for qualifying property placed in service in tax years starting in 2018, the expensing limit increases to $1 million (from $510,000 for 2017), subject to a phaseout if your qualified asset purchases for the year exceed $2.5 million (compared to $2.03 million for 2017). These amounts will be adjusted annually for inflation, and for 2019 they’re $1.02 million and $2.55 million, respectively.

Accelerated depreciation

This break allows a shortened recovery period of 15 years for qualified improvement property. Before the TCJA, the break was available only for qualified leasehold-improvement, restaurant and retail-improvement property.

Bonus depreciation

This additional first-year depreciation allowance is available for qualified assets, which before the TCJA included qualified improvement property. But due to a drafting error in the new law, qualified improvement property will be eligible for bonus depreciation only if a technical correction is issued.

When available, bonus depreciation is increased to 100% (up from 50%) for qualified property placed in service after Sept. 27, 2017, but before Jan. 1, 2023. For 2023 through 2026, bonus depreciation is scheduled to be gradually reduced. Warning: Under the TCJA, real estate businesses that elect to deduct 100% of their business interest will be ineligible for bonus depreciation starting in 2018.

Can you benefit?

Although the enhanced depreciation-related breaks may offer substantial savings on your 2018 tax bill, it’s possible they won’t prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules. In some situations — such as if in the future your business could be in a higher tax bracket or tax rates go up — the normal depreciation deductions could be more valuable long-term.

For more information on these breaks or advice on whether you should take advantage of them, please contact us.

© 2019

The results of the third annual Leading Edge Alliance (LEA Global) National Manufacturing Outlook Survey have been released and manufacturers are optimistic.

Eight out of ten U.S. manufacturers expect to grow sales this year, buoyed by their optimism about the strength of regional, national and global economies, according to the 2019 National Manufacturing Survey Report prepared by the Leading Edge Alliance, a global association of 220 accounting and consulting firms.

“Across the board, manufacturers are optimistic about the regional economy, sector growth, and increasing revenue expectations in 2019,” the report states. “Looking ahead, manufacturers expect raw materials, labor costs, lack of available talent, and competition to be significant hurdles in 2019. The tariffs implemented by President Trump provide productivity issues; however, an increase in spending on Big Data and business intelligence are delivering innovative technology for minimizing productivity concerns.”

More than 350 manufacturing executives across the United States and Canada participated in the survey, which includes respondents who produce industrial/machining; transportation/automotive; construction; food and beverage; and other products.

2019 Survey Highlights

• Growth: 81% of manufacturers expect their revenue to increase in 2019, and 61% expect their overall sector to expand in 2019.
• Economy: Optimism for the regional, national and global economies has increased by more than 12 percentage points over the last two years.
• Priorities: Manufacturers’ top three priorities are growing sales, improving profitability and addressing the workforce shortage.
• Challenges: Most manufacturers (52%) cited labor/talent as their greatest barrier to growth, followed by competition (34%) and profitability (25%).

The survey identifies three key growth strategies manufacturers will use to keep their companies on a growth track: technology, mergers and acquisitions, and talent management. 

• Technology: Manufacturers plan to leverage technology as a key to solving productivity concerns; 76% said that they would investigate/prioritize cybersecurity in 2019, and 43% said they would prioritize Big Data/erp solution/IoT.
• M&A: More manufacturers are considering a merger/sale or acquisition in 2019; 21% expect to acquire another business in 2019, and 16% are in the pre-planning stage of a merger or acquisition.
• Talent: Faced with a growing labor shortage, manufacturers have turned to a range of tools to improve hiring and retention with 62% increasing compensation, 39% implementing retention strategies and 35% using internal training programs.

Manufacturing owners and managers should have ongoing conversations with all of their advisors, including their accounting and tax provider, about how to overcome these challenges and achieve their business goals.

“Despite the improved outlook, hurdles remain. Increasing material and labor costs, labor shortages, implementing new technologies, cybersecurity and tax reform are growing concerns of manufacturers going into 2019. Especially now – when manufacturers are considering mergers and acquisitions and developing strategies for growth – having a team of industry-experienced advisors providing manufacturers insight and answers is critically important,” says Yeo & Yeo Principal and Manufacturing Services Group leader Amy Buben.

Read the entire survey report, 2019 National Manufacturing Survey Report.

 

 

 

 

 

 

Each year, thousands of taxpayers are tricked into revealing their personal information online and lose millions of dollars. A recent phishing attempt targeted Michigan business taxpayer W-2 forms.

The IRS compiles annually its “Dirty Dozen,” a list of common scams that taxpayers may encounter at any time of year, but peak during filing season. Phishing schemes are just one of the many types of scams the IRS warns against. Some of the types of tax scams to be on the lookout for include:

• Pop-up tax preparer fraud
• Social Security identity theft
• Aggressive phone calls from the “IRS”
• Bogus IRS agent visits
• Unexpected refund fraud
• Fake charities
• Targeting employees for W-2 and personal information
• Tax transcript documents containing malware

Follow the IRS Newsroom for information about scams that are circulating and to learn more about how the IRS initiates contact.The IRS does not initiate contact with taxpayers by email, text message 100cs or social media channels to request personal or financial information. Please be wary of individuals who contact you, claiming to be IRS agents or collection agents working for the IRS.

Taxpayers who have received a call or an email from a scammer should report the case to the IRS at www.irs.gov or call 800-366-4484.

Additional Resources

10 Practices to Protect Against Cyberattacks and Phishing Scams

File Early to Avoid Identity Theft

Security Awareness Training – Educate Your Employees (Yeo & Yeo Technology)

How to Know It’s Really the IRS Calling or Knocking on Your Door (IRS Resource)

IRS Warns of Scam — Falsely Filed Returns with Refunds Deposited into Taxpayer’s Account

Treasury Warns of Collections Scam

 

 

 

 

A variety of tax-related limits affecting businesses are annually indexed for inflation, and many have gone up for 2019. Here’s a look at some that may affect you and your business.

Deductions

Section 179 expensing:

• Limit: $1.02 million (up from $1 million)
• Phaseout: $2.55 million (up from $2.5 million)

Income-based phase-ins for certain limits on the Sec. 199A qualified business income deduction:

• Married filing jointly: $321,400-$421,400 (up from $315,000-$415,000)
• Married filing separately: $160,725-$210,725 (up from $157,500-$207,500)
• Other filers: $160,700-$210,700 (up from $157,500-$207,500)

Retirement plans

• Employee contributions to 401(k) plans: $19,000 (up from $18,500)
• Catch-up contributions to 401(k) plans: $6,000 (no change)
• Employee contributions to SIMPLEs: $13,000 (up from $12,500)
• Catch-up contributions to SIMPLEs: $3,000 (no change)
• Combined employer/employee contributions to defined contribution plans (not including catch-ups): $56,000 (up from $55,000)
• Maximum compensation used to determine contributions: $280,000 (up from $275,000)
• Annual benefit for defined benefit plans: $225,000 (up from $220,000)
• Compensation defining “highly compensated employee”: $125,000 (up from $120,000)
• Compensation defining “key employee”: $180,000 (up from $175,000)

Other employee benefits

Qualified transportation fringe-benefits employee income exclusion: $265 per month (up from $260)

Health Savings Account contributions:

• Individual coverage: $3,500 (up from $3,450)
• Family coverage: $7,000 (up from $6,900)
• Catch-up contribution: $1,000 (no change)

Flexible Spending Account contributions:

• healthcare: $2,700 (up from $2,650)
• Dependent care: $5,000 (no change)

Additional rules apply to these limits, and they are only some of the limits that may affect your business. Please contact us for more information.

© 2019

The Internal Revenue Service issued a new warning for taxpayers to be alert for a quickly growing scam involving erroneous tax refunds being deposited into taxpayers’ bank accounts. Criminals have put a new twist on an old scam: They file fraudulent tax returns and use taxpayers’ real bank accounts for the deposit of the fraudulent refunds. Then they use various tactics to reclaim the refund from the taxpayers. Here is what you need to be wary of:

• In one version of the scam, criminals pose as debt collection agency officials acting on behalf of the IRS. The criminal contacts the taxpayer to resolve a refund deposited in error and requests that the taxpayer return the refund to them, the fraudulent collection agency.
• In another version, the taxpayer who received the erroneous refund gets an automated call with a recorded voice saying he is from the IRS and threatens the taxpayer with criminal fraud charges, an arrest warrant and a “blacklisting” of their Social Security Number. The recorded voice gives the taxpayer a case number and a telephone number to call to return the refund.

The IRS has urged taxpayers to follow established procedures (outlined below) for returning an erroneous refund to the agency. The IRS also encouraged taxpayers to contact their tax preparers immediately and to discuss the issue with their financial institutions because there may be a need to close bank accounts.

Here are the official ways to return an erroneous (fraudulent) refund to the IRS:

 If the erroneous refund was a direct deposit:

1. Contact the Automated Clearing House (ACH) department of the bank or financial institution where the direct deposit was received and have them return the refund to the IRS.
2. Call the IRS toll-free at 800-829-1040 (individual) or 800-829-4933 (business) to explain why the direct deposit is being returned.

 
 If the erroneous refund was a paper check and hasn’t been cashed:

1. Write “Void” in the endorsement section on the back of the check.
2. Submit the check immediately to the appropriate IRS location listed below.
3. Do not staple, bend, or paper clip the check.
4. Include a note stating, “Return of erroneous refund check because (and give a brief explanation of the reason for returning the refund check).” 

 If the erroneous refund was a paper check and you cashed it: 

Submit a personal check, money order, etc., immediately to the appropriate IRS location listed below.

If you no longer have access to a copy of the check, call the IRS toll-free at 800-829-1040 (individual) or 800-829-4933 (business) and explain to the IRS assistor that you need information to repay a cashed refund check.

Write on the check/money order: Payment of Erroneous Refund, the tax period for which the refund was issued, and your taxpayer identification number (social security number, employer identification number, or individual taxpayer identification number).

Include a brief explanation of the reason for returning the refund.

Repaying an erroneous refund in this manner may result in interest due the IRS.

IRS mailing addresses for returning paper checks

For your paper refund check, following are the IRS mailing addresses to use based on the city (possibly abbreviated). These cities are located on the check’s bottom text line in front of the words TAX REFUND:

• ANDOVER – Internal Revenue Service, 310 Lowell Street, Andover MA 01810
• ATLANTA – Internal Revenue Service, 4800 Buford Highway, Chamblee GA 30341
• AUSTIN – Internal Revenue Service, 3651 South Interregional Highway 35, Austin TX 78741
• BRKHAVN – Internal Revenue Service, 5000 Corporate Ct., Holtsville NY 11742
• CNCNATI – Internal Revenue Service, 201 West River Center Blvd., Covington KY 41011
• FRESNO – Internal Revenue Service, 5045 East Butler Avenue, Fresno CA 93727
• KANS CY – Internal Revenue Service, 333 W. Pershing Road, Kansas City MO 64108-4302
• MEMPHIS – Internal Revenue Service, 5333 Getwell Road, Memphis TN 38118
• OGDEN – Internal Revenue Service, 1973 Rulon White Blvd., Ogden UT 84201
• PHILA – Internal Revenue Service, 2970 Market St., Philadelphia PA 19104

Please be wary of calls from individuals claiming to be IRS agents or collection agents working for the IRS, or if you receive an unexpected refund. Contact your Yeo & Yeo tax professional if you have questions or need assistance.

 

Taxpayers around the area continue to receive calls from alleged IRS representatives stating that “This is a final notice from IRS that we are filing a lawsuit against you.” The callers are often rude and belligerent. If you are not home they will leave a message 100c and tell you to call a phone number.

This is a scam and is intended to steal information and, if possible, funds from unwary victims. The calls often originate from outside the U.S. and can be computer-generated.

The IRS will not act in this manner and will not call a taxpayer on the telephone without having had some real contact with that taxpayer. If you receive such a call, hang up. You may report the call using the IRS Report Phishing website.

Contact your Yeo & Yeo tax professional for assistance.

There are two common standards of value that are used by valuation analysts that you may be aware of, Fair Market Value and Fair Value. However, when you and your client have determined the need for a valuation, it is important to understand the other standards of value so that you are best able to apply the most appropriate standard for your situation.

Depending on the purpose of a valuation, a number of standards of value can be applied. Each of the five widely used standards of value discussed below have specific purposes, and selecting one over another can make a difference in the valuation conclusion. Becoming familiar with each of the standards of value will better equip you to make decisions based on the type of valuation needed and the purpose for the valuation – which could benefit both you and your client throughout the process. 

Five of the most widely used standards of value are:

1. Fair Market Value – The IRS defines fair market value as, “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.” This standard if most appropriate for estate taxes, gifting, buy-sell agreements with minority shareholders, and other instances where discounts for minority interest or lack of marketability may apply.
   
   
2. Fair Value – Not clearly defined by statute or valuation doctrine. Generally speaking, it may constitute fair market value without the application of discounts or premiums. This standard of value takes into account the economic principles of free and open market activity. Used more to determine the pro-rata price per share of an enterprise. Most appropriate with shareholder disputes, buy-sell agreements with equal partners, or lost profits or other damage calculations.
   
   
3. Liquidation Value – This is the net proceeds that the company would receive, after paying off all outstanding debt, if they ceased business operations and sold all company assets in an orderly fashion. This would represent the minimum value for the business and concludes that the business is worth more dead than alive. This method is used in bankruptcy scenarios or in the event of a business breakup where the owners cannot agree to an equitable dissolution of their relationship.
   
   
4. Enterprise Value – This value represents the gross value of the business operations from the eyes of a potential purchaser. It generally will look at the business on a cash-free, debt-free basis. This method is used in looking at the value of a business from a merger or acquisition standpoint for the potential purchase or sale of the business.
   
   
5. Holder’s Interest Value – Differing from fair market value, which assumes a hypothetical buyer and seller, holder’s interest approach values the business in the hands of its current owner and does not anticipate a sale of the business. This method is generally used in the valuation of professional practices for divorce purposes, where the personal service and goodwill of the owner is a significant factor in the success of the practice.

Depending upon the purpose of the valuation, the operations of the company, and the parties involved, the standard of value, and thus the conclusion of value, could be substantially different. Be sure that all stakeholders to the valuation fully understand the standard of value chosen and the significance it may have in the overall value. Contact a business valuation analyst at Yeo & Yeo if you have questions about standards of value, which one is most appropriate for your situation, and how selecting one over another can make a difference in the conclusion of the valuation. Yeo & Yeo’s Business Valuation and Litigation Support Services professionals can guide you in determining the fairest and appropriate course of action for you and your client.

If you’re like many Americans, you may not start thinking about filing your tax return until the deadline. Filing as close to the start date as possible could protect you from tax identity theft.

How filing early helps

In this increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the thief who’s filing the duplicate return, not you.

Another key date

Of course you need to have your W-2s and 1099s to file. So another key date to be aware of is January 31 — the deadline for employers to issue 2018 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2018 interest, dividend or reportable miscellaneous income payments.

An added bonus

Let us know if you have questions about tax identity theft or would like help filing your return early. An added bonus of filing early, if you’ll be getting a refund, is enjoying that refund sooner.

© 2019

 

Intuit has implemented five major technologies within QuickBooks to keep customers’ data secure while conducting business through QuickBooks Online (QBO).

Data backup

• Each night, Intuit performs backups, and the data is copied to tapes. Periodically, the tapes are moved offsite to a secure location.
• Each time data is added or edited, it is written to two hard drives. Then data is copied to a third hard drive, just in case the first two hard drives fail.

Viruses

• Intuit keeps data on a server in Intuit’s Data Center, which is guarded both physically and electronically against viruses and other forms of intrusion.

Firewall protection

• The firewall used by Intuit acts as a barrier to prevent unauthorized individuals and programs from accessing customers’ data. QBO’s data servers are not directly connected to the internet, so private information is available only to authorized users and computers. QBO also employs the same technology used for credit card transactions (SSL technology) over the internet to protect customers’ data.

ID and password protection

• Having a strong password will help keep QBO data secure. Professionals recommend users create passwords that include alternating capital letters, numbers, and special characters (such as @*!^, etc.).

Audit trails

• Keeping close track of who is entering and viewing data is important for data security within QBO. The Audit Logs allow users to see each action that takes place within their QBO company file and who performed each particular action. Contact a Yeo & Yeo QB ProAdvisor today if you need help accessing this report.

For more information about QuickBooks Online or cybersecurity measures to defend your network, contact a member of Yeo & Yeo’s Client Accounting Software Team.

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business increased by 3.5 cents, to the highest level since 2008. As a result, you might be able to claim a larger deduction for vehicle-related expense for 2019 than you can for 2018.

Actual costs vs. mileage rate

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.

The mileage rate comes into play when taxpayers don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.

The mileage rate approach also is popular with businesses that reimburse employees for business use of their personal automobiles. Such reimbursements can help attract and retain employees who are expected to drive their personal vehicle extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their individual income tax returns.

But be aware that you must comply with various rules. If you don’t, you risk having the reimbursements considered taxable wages to the employees.

The 2019 rate

Beginning on January 1, 2019, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 58 cents per mile. For 2018, the rate was 54.5 cents per mile.

The business cents-per-mile rate is adjusted annually. It is based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there is a substantial change in average gas prices, the IRS will change the mileage rate midyear.

More considerations

There are certain situations where you can’t use the cents-per-mile rate. It depends in part on how you’ve claimed deductions for the same vehicle in the past or, if the vehicle is new to your business this year, whether you want to take advantage of certain first-year depreciation breaks on it.

As you can see, there are many variables to consider in determining whether to use the mileage rate to deduct vehicle expenses. Contact us if you have questions about tracking and claiming such expenses in 2019 — or claiming them on your 2018 income tax return.

© 2019

 

Tax planning should be on the minds of all farmers. Due to the new tax laws that took effect in 2018, tax planning for 2018 – and this coming year – is more important than ever. Farmers should be ready to spend some extra time with their tax advisors to take full advantage of the new rules.

Here are some of the main issues that will need to be considered.

Section 199A

Section 199A is a new deduction for all pass-through businesses in 2018, such as partnerships, S-Corporations or LLCs. However, there are many subtle nuisances in the 199A deduction that need to be considered to make sure taxpayers are getting the full benefit of the deduction.

Farmers with incomes over $157,500 (single) or $315,000 (joint) face certain limits on the deduction. The final deduction may be limited by the rules to 50% of W-2 wages or 25% of W-2 wages plus 2.5% of qualified property. While this could be bad news for some entities with no wages, the new law also allows taxpayers to aggregate entities under common control and that have a commonality to the aggregation, such as the land being rented to the farm or the trucks being used on the farm. This could allow entities who might not be allowed a deduction on their own to get a benefit. However, the taxpayer has to make a formal election on their tax return in order to take this aggregation, so care should be taken to make sure the return is properly filed.

The most recent guidance from the IRS does not qualify cash rent as business income, and the 20% Section 199A deduction is only for qualified business income. To qualify, the income must be tied together with a farm operation. This means the entity must be a common group, which means at least 50% of the ownership in each is held by the same people.

Bonus depreciation

For purchases made during 2018 through December 31, 2022, 100% bonus depreciation applies to certain farm property, including used property. However, taxpayers should remember that bonus depreciation is a tax deferral, not an extra deduction. Therefore, if they later sell the assets, they would have to pay income tax on the proceeds. Depending on their income and the type of assets, farmers may want to consider opting out of bonus depreciation in certain situations.

Net operating losses

The new tax law allows farmers to carry back their net operating losses only two years or elect to carry it forward. The maximum loss a farmer can recognize is $250,000 (single) or $500,000 (joint), so the new rules make planning important for clients who are facing a loss this year.

Change in tax rates and brackets

Overall, tax rates will be lower for most taxpayers in 2018 as the rates and brackets have changed. Therefore, it will be important for farmers to do as much planning as possible to try and determine where their net income will end up for the year to take advantage of these new rates.  

Itemized deductions

The new tax laws eliminated the deduction for personal exemptions but also increased the standard deduction to $24,000 (joint filers) and $12,000 (single). Therefore, many taxpayers will no longer need to itemize deductions because of the larger standard deduction amount. This law change may also affect how taxpayers structure their charitable giving, so this is another area they should discuss with their tax preparers.

Estimated tax payment

Although many farmers are conditioned to file by March 1 to avoid paying any estimated taxes before that date, they may want to consider making an estimated tax payment by January 15. This will enable them not to have to file their returns until April 15. This will give their tax preparers sufficient time to gather all the information necessary to file a complete and accurate return, especially for higher income taxpayers.

Medical deductions

If a taxpayer had large medical expenses in 2018 or is paying for long-term care, they should consider taking the deduction on the 2018 tax return. The medical deduction changes in 2019, so they would receive a bigger deduction for those medical expenses paid in 2018 versus 2019.

Contact your Yeo & Yeo tax professional for assistance in planning the best strategy for your situation.